Business Expenses: What Can You Claim?
Allowable expenses reduce the profit on which a sole trader or partnership pays Income Tax. Limited companies can deduct qualifying costs when calculating Corporation Tax. However, the detailed rules differ according to the business structure and type of expenditure.
The Basic Rule
For a sole trader, an expense normally needs to be incurred wholly and exclusively for the trade. Where a cost has both business and private use, the identifiable business proportion may sometimes be claimed.
A limited company is legally separate from its directors. Personal costs paid by the company may create a benefit, salary, dividend or director’s loan account entry rather than an allowable expense.
Common Allowable Costs
Depending on the circumstances, claims may include:
- Office supplies, postage and business software
- Accountancy, legal and professional fees
- Insurance and relevant subscriptions
- Advertising and website costs
- Wages, employer National Insurance and pensions
- Business travel, excluding ordinary commuting
- Premises and qualifying homeworking costs
- Stock and materials used by the business
Equipment, computers, machinery and vehicles may be capital rather than ordinary expenses. Tax relief may be available through capital allowances.
Commonly Disallowed Costs
Personal spending, ordinary commuting, normal clothing, fines and penalties are generally not deductible. Client entertaining can usually be paid by a business but is normally disallowed when taxable profit is calculated.
The treatment of food, travel, vehicles, training and homeworking depends on the facts. A cost is not automatically allowable simply because it was paid from the business bank account.
When the business reimburses an owner or employee, keep the claim, supporting documents and evidence that the cost relates to the business.
VAT recovery is a separate question from whether an expense reduces taxable profit. A VAT-registered business normally needs a valid VAT invoice and must consider any restrictions on recovery. Some expenses may be allowable for direct-tax purposes while the VAT is blocked or unavailable.
Keep Suitable Evidence
Keep invoices, receipts and an explanation of the business purpose. A bank statement may prove payment, but it might not show what was purchased or whether VAT can be recovered. Deal with missing receipts promptly.
Accurate bookkeeping helps ensure valid expenses are claimed and personal costs are identified.
GMS Accountants supports sole traders and limited companies in Cambridge and Nottingham with expense reviews and tax returns. Contact us for advice based on your circumstances.
